How to Grow When Markets Don't

1. Traditional Growth Models Are Failing: Embrace Demand Innovation

Profits and shareholder value are leaving industries altogether as markets become increasingly saturated and traditional sources of growth run out of steam.

The growth crisis. Many businesses face a severe growth crisis, as traditional strategies like product innovation, global expansion, and mergers & acquisitions are no longer yielding significant, sustained returns. Markets are saturated, competition is fierce, and value is increasingly flowing out of industries rather than migrating between competitors. This stagnation impacts everyone, from middle managers seeing fewer promotions to senior executives struggling to meet earnings forecasts.

Depleted avenues. Classic product-focused strategies, such as brand extensions, core product enhancements, and new product introductions, now often only replace lost revenues due to commoditization. International markets are maturing, and M&A activity, while high in the past, rarely creates new value and faces increasing scrutiny. Companies with nominal double-digit growth often have real growth rates in their base businesses of less than 5%.

A new approach. To escape this trap, companies must rethink their approach to growth. The solution lies in "demand innovation," a powerful new business approach that focuses on creating new profits by recognizing and addressing opportunities that surround a product, rather than merely improving the product itself. This shift is crucial for long-term survival and prosperity.

2. Shift Focus to the Customer's Entire Value Chain

While the product sale may be the culmination of the manufacturers' efforts, it usually marks the beginning of the customer's.

Beyond the product. Demand innovation requires understanding and acting on customers' most urgent problems and priorities, extending beyond the product's functionality. This means asking: "Where do customers spend the most time and money in areas related to my product or service? How can I help them improve their operations, reduce their risk, or grow their own revenues?" This broader web of activity is the "customer's internal value chain."

Uncovering opportunities. Within this value chain, tremendous economic activity exists—often ten to twenty times greater than the product market itself—filled with hassles and inefficiencies. Companies can grow by helping customers:

• Improve their cost structure (e.g., Cardinal Health managing hospital pharmacy logistics).
• Reduce complexity and make better decisions (e.g., Johnson Controls designing entire automotive interiors).
• Reduce risk and volatility (e.g., Air Liquide guaranteeing production output).
• Grow their top-line revenues (e.g., John Deere Landscapes offering customer financing).

Redefining the buyer. This shift often means engaging with different buyers within the customer's organization, moving higher up the hierarchy to find decision-makers concerned with broader economic issues. The goal is to transform from a mere supplier into a key economic partner, anticipating needs rather than just responding to them.

3. Leverage Your Company's Unique "Hidden Assets" for Growth

When skillfully used, hidden assets can drastically reduce the cost of acquiring customers, the cost of developing unique offerings to address new customer needs, and the cost of delivering those offerings.

Unrecognized value. Established companies possess "hidden assets"—pools of potential value developed over years or decades that are often ignored in the quest for growth. These are distinct from traditional intangible assets like brands or intellectual property, encompassing a much broader and richer universe. They are crucial for making demand innovation profitable.

Types of hidden assets:

• Customer Relationships: Unique access, deep insight, high interaction levels (e.g., GM's installed vehicle base for OnStar).
• Strategic Real Estate: Advantaged position in the industry value chain, ownership of portals or access points (e.g., DeWolfe's Realtor role in home buying).
• Enterprise Networks: Third-party relationships, user communities, deal flow (e.g., John Deere's authority in the green market).
• Information: Systems, technical know-how, market window, by-product data (e.g., Air Liquide's process expertise, Tsutaya's customer data).

Economic leverage. Hidden assets offer huge investment leverage. Once created, they can be extended or reused at little to no marginal cost, significantly improving the economics of meeting next-generation customer needs. They also multiply when used and create powerful, difficult-to-replicate competitive barriers, unlike easily outsourced traditional assets.

4. Recognize and Overcome "Hidden Liabilities" That Stifle Innovation

Most companies have a treasure trove of unused hidden assets on the left side of this balance sheet. But those assets are usually offset by a swamp of hidden liabilities on the right side.

The invisible ledger. Just as companies have hidden assets, they also carry "hidden liabilities"—unrecognized features of their mindset and systems that actively hinder new-growth efforts. These liabilities can undermine initiatives, cause misread markets, delay action, or lead to poor execution, often devouring new ventures before they even begin.

Categories of liabilities:

• Cultural Liabilities: Risk aversion, "corporate antibodies" that reject change, a mindset molded by commodity cycles, or a lack of genuine leadership commitment to growth.
• Structural Liabilities: Cumbersome decision cycles, flawed budgeting processes that penalize new ventures, a "fixed-plant" mindset, lack of appropriate skills, or inflexible measurement and information systems (e.g., a system unable to record service revenue).
• External Liabilities: Brand limitations (e.g., Xerox struggling to extend beyond copiers), customer unwillingness to grant new authority, channel conflicts (e.g., Ford's struggle with dealers), or investor resistance to changes in the profit model.

Conscious identification. Overcoming these liabilities is as critical as leveraging hidden assets. They must be consciously identified, mapped, and understood. While a burst of heroics might occasionally succeed, building a sustainable growth system requires systematically neutralizing, minimizing, or working around these ingrained obstacles.

5. Empower Middle Managers as Catalysts for New Growth

You can play a powerful role in leveraging your companies' hidden assets, overcoming hidden liabilities, and creating new-growth opportunities.

The engine of change. Middle managers are uniquely positioned to be "growth catalysts" within their organizations. They possess a hands-on understanding of the company's invisible balance sheet—its hidden assets and liabilities—from a ground-level view. Unlike senior leaders, they often interact daily with customer concerns, witnessing firsthand how products work (or don't) and where new value can be created.

Operating below the radar. Middle managers can initiate change by operating "below the corporate radar." They can launch small pilot projects, leveraging underutilized talent and borrowed resources, without waiting for formal approval or significant funding. By demonstrating early successes and gathering data, they can build internal momentum and make it easier for senior management to eventually commit.

Network power. Middle managers are part of the most powerful network in any corporation, as nothing truly happens without their buy-in and execution. They can:

• Support other managers with smart growth ideas.
• Enlist colleagues' expertise for their own initiatives.
• Model growth-oriented thinking and behavior, inspiring others.
  This collective action can expand their "zone of control" and drive significant change, even in growth-unfriendly cultures.

6. Senior Leaders Must Build an Operating System for Growth

Success in creating new growth again and again requires that your organization develop an operating system to identify, shape, and nurture new-growth initiatives.

The CGO's mandate. For CEOs and senior executives, the challenge is to move beyond relying on individual "mavericks" and instead build a systemic "operating system for growth." This involves managing the inherent tensions between short-term earnings and long-term investment, and between supporting innovation and maintaining core business focus.

Six key principles:

• Operational Excellence: Reinforce the core business to generate funds and credibility for new ventures (e.g., Cardinal Health's efficient distribution centers).
• Mandate New Growth: Distribute growth responsibility and incentives to operating managers, making growth a daily discipline (e.g., Cardinal's absolute and relative growth metrics).
• Support & Winnow Ideas: Encourage focused innovation within defined spaces, using staged evaluation processes to filter ideas (e.g., Johnson Controls' "gate" system).
• High-Level Support: Provide visible, active commitment through time, political capital, and strategic funding (e.g., GM's top leadership backing OnStar).
• Structure New Business: Tailor organizational structures, metrics, and incentives to the unique needs of new ventures, rather than replicating existing ones (e.g., John Deere Landscapes' independent operation).
• Build Asset Base: Use capability acquisitions and alliances to fill missing skill sets and resources, rather than relying solely on homegrown talent (e.g., Johnson Controls acquiring Prince Automotive).

This comprehensive approach ensures that growth is not accidental but a deliberate, integrated, and continuously evolving discipline.

7. Decode Consumer Economics: Solve Hassles and Tap Emotions

Consumers also have some of the same sorts of practical higher-order needs as businesses. While individuals don't keep balance sheets and profit and loss statements, they do have budgets, schedules, and the need to juggle both in an increasingly complicated world.

Beyond product features. Consumer companies face even bleaker growth prospects than B2B counterparts due to market saturation and limited discretionary spending. However, significant opportunities exist by addressing consumers' higher-order needs, which are both practical and emotional. Practical needs include efficiency, streamlining, and ease of use, while emotional needs encompass peace of mind, self-definition, and belonging.

Solving practical pain points:

• Progressive Insurance: Eliminated the hassle and anxiety of car accident claims with fast, on-site assessment and immediate payouts.
• DeWolfe Homeowner Services: Streamlined the complex home-buying process by offering integrated mortgage, insurance, and moving services under one roof.
• Mobil Speedpass: Reduced the "hassle factor" of buying gas with a quick, cashless transaction system, also boosting convenience store sales.

Tapping emotional connections:

• Virgin: Built an affinity brand around a youthful, independent lifestyle, allowing expansion into diverse, seemingly unrelated markets like airlines, music, and mobile phones.
• Kodak: Leveraged its brand credibility and digital technology to offer online image management, storage, and sharing services (Ofoto), connecting with customers' emotional desire to preserve memories.

By understanding these deeper needs, companies can differentiate their offerings, build loyalty, and unlock new market opportunities.

8. Monetize Information Assets for New Revenue Streams

For most companies, information is becoming the largest asset that they own.

The sleeping giant. Information assets are increasingly pervasive and represent a critical, yet often overlooked, category of hidden assets. They are powerful for addressing complex customer needs like managing risk, improving workflows, and anticipating problems, as timely and accurate information is crucial. Information systems are expensive to deploy but offer low marginal costs for reuse and can be customized and delivered remotely.

Turning data into profit:

• Tsutaya (Japan): Used extensive customer data from video/music rentals to tailor personalized offers, boost sales, and create a new revenue stream by selling market intelligence to other companies like Kirin.
• Dassault Systemes: Commercialized its internally developed 3D design software (CATIA) for aerospace, then expanded to other industries. This internal tool became a separate, highly valuable business, even surpassing its parent company's market capitalization.
• GE Medical Systems (GEMS): Capitalized on the shift to digital medical imaging by developing Picture Archiving and Communication Systems (PACS). This allowed hospitals to store, analyze, and communicate images more efficiently, improving patient care and creating a lucrative market in software and IT services.

Untapped potential. Many companies possess vast amounts of underutilized information—warranty data, transaction histories, technical expertise, point-of-sale data—that can be leveraged for new growth. The challenge is recognizing this wealth and creatively applying it to solve customer problems or create entirely new information-based businesses.

9. Implement Short-Term "Transitional" Moves for Immediate Impact

This is where short-term moves come in—practical and tactical ideas you can start implementing immediately, built on your current business.

Quick wins, lasting impact. While long-term demand innovation is crucial, companies also need short-term "transitional" moves to generate quick gains in revenue and profits. These moves build new capabilities and mindsets, paving the way for more significant growth initiatives. Many can be driven by middle managers without extensive senior management approval.

Magnificent Seven short-term moves:

• Deaveraging & Resegmenting: Take a fresh look at your customer base through the lens of next-generation needs (e.g., Home Depot's Pro Initiative for contractors).
• Strategic Customer Program: Forge deeper relationships with key customers to uncover emerging needs (e.g., Clarke American's key account program).
• Replicating Best Relationships: Identify and scale successful, often informal, value-added services provided to a few special customers (e.g., WorldWire Telecom's Service Circles).
• Value Pricing: Articulate and defend the tangible value you deliver to influence price negotiations and charge for formerly "free" services (e.g., ABC Risk's enhanced service pricing).
• Evolving to System Offers: Turn stand-alone products into components of a broader system of integrated offerings (e.g., Ensure's nutritional suite).
• Value-Added Wrapper: Add easy-to-deliver but valuable supporting services around your product (e.g., UPS tracking, BMW maintenance).
• Shifting Brand Equity: Emphasize emotional and affinity elements of your brand to build loyalty and credibility for future ventures.

These tactics not only boost the bottom line but also provide invaluable learning opportunities about customer needs and internal capabilities.

10. Develop a Comprehensive Growth Action Plan for Sustainable Success

The great paradox of business is this: You should be most aggressive about creating new growth when the business model is at the peak of its performance—that is, at the moment when you least seem to need to, and when you are least psychologically prepared to do so.

Proactive planning. Companies must proactively address the growth challenge, ideally before traditional growth avenues are fully exhausted. This requires a realistic assessment of where the company stands on its "growth curve" and defining a clear "growth gap" between current projections and desired targets.

The growth spectrum. A comprehensive action plan maps initiatives across a "growth spectrum" to ensure a balanced portfolio:

• Traditional: Acquisitions, international expansion, price, cost cutting.
• Enhanced Product Position: New products, extensions, differentiation.
• Transitional: Resegmentation, replicating best customer relationships, value pricing.
• New Growth: Product/service integration, bundled solutions, downstream offers.
• Information-Based: Integrated information offerings, performance guarantees, selling information.
  This mapping reveals structural soundness and investment balance, ensuring resources are allocated to areas with the greatest potential.

The acid test. A robust growth action plan is built through honest dialogue among senior leaders, middle managers, and key customers. It must be aggressive yet practical and realistic, including a buffer for the unexpected. Before implementation, it must pass an "acid test" by addressing critical questions from employees, board members, and investors, ensuring their belief in the plan's viability and the company's commitment to its execution.